Can States Go Bankrupt & Are There Exceptions to the Unfunded Pensions?

Posted Nov 25, 2013 by Martin Armstrong

Obviously, large cities can be bankrupt (Detroit, Chicago may be next).

Florida’s pension plan is about 85% funded and in the top 10 states that have well funded pension plans.

Do you think it is possible for an entire state to declare bankruptcy?

If so, when?

I know I’m asking a lot.

Thanks for you opinion….P

ANSWER: Some states do have money. I directly speak to some fund managers for states that are managing state pension funds. They have had to shift to equities because they cannot meet obligations. The danger is the Federal government comes rushing in to help i.e. its SAFE ACT. They are more likely than not to seize control of all pension funds and the spread the wealth and try to fix the problem that way.

Can a state go bankrupt? Yes they did and that was the after the Panic of 1837. They were related to the Jackson’s shutting down the Bank of the US that ended up in States having to bailout banks. In 1841 and 1842, eight states and the Territory of Florida defaulted on their sovereign debts. Traditional histories of the default crisis have stressed the causal role of the depression that began with the Panic of 1837, unexpected revenue shortfalls from canal and bank investments as a result of the depression, and an unwillingness of states to raise tax rates. None of these stylized facts fits the experience of states at all. The majority of state debts in default in 1842 were contracted after the Panic of 1837.

In truth, the sterilized history has sought to deflect the blame from Andrew Jackson’s destruction of the Bank of the USA whereby this produced the famous Broken Banknote Crisis of the era as the state banks collapsed. Most states did not expect canal investments to return substantial revenues by 1841 and so could not experience unexpected shortfalls in those revenues. Additionally, most states were willing to raise tax rates substantially, so the Marxists who were against banks and the rich crafted the history to support their views.

The real relationship between land sales and land values explains much of the timing of state borrowing and the default experience of western and southern states. Pennsylvania and Maryland defaulted because they postponed the imposition of a state property until it was too late.

Jackson’s destruction of the Bank of the US was coupled with his moving federal deposits to state banks and that gave the wrong impression that any state bank was somehow better. They all issued their own currency and much of it was just a scam. The debts taken on by the States were to try to support the banks and land prices following the Panic of 1837. It was this issue of debt that was defaulted on. Even the Bank of England still has on its books bonds from some of these states that were defaulted on permanently.